The Hindu : Mixed signals

Online edition of India's National Newspaper
Friday, Jul 05, 2002

Opinion

Opinion - Editorials

Mixed signals

A CHANGE OF guard at the Finance Ministry has been preceded, by a coincidence, by a string of official statistics on the recent performance of the economy. Seen together, the Central Statistical Organisation's estimates of economic growth in 2001-02 and the Reserve Bank of India's compilation of the balance of payments (BoP) in the external sector would seem to suggest that an economic revival has begun. But that would be an erroneous inference to draw from these statistics. However, it must be said that the economic data for the first couple of months of the current fiscal year do, on the balance, point to a possible upswing though this does remain restricted to a handful of sectors.

The CSO's quick estimates of the gross domestic product show acceleration in growth in each successive quarter of 2001-02 and place economic growth during the entire year at 5.4 per cent, up from 4 per cent the year before. But this should not be seen as ending the sluggish growth phase for, the upturn last year was driven essentially by the recovery in agriculture which had been badly affected by a drought in 2000-01. Since this was essentially a cyclical phenomenon, it was not a harbinger of a larger revival. A few service sectors did also perform well last year, but the biggest disappointment was the manufacturing sector where growth sharply dropped in 2001-02. The BoP data for last year present a more unambiguous picture. For the first time since 1977-78, the current account of the external sector showed a surplus and there was an overall increase of more than $11 billion in the foreign exchange reserves. But here again some circumspection is in order. The surplus on the current account was not the result of any impressive performance in exports. Indeed, merchandise exports last year were marginally lower than the year before. If yet the current account of the BoP registered a surplus then this was the result of imports declining more than exports and a substantial growth in income from trade in services such as software exports and remittances. Receipts from services, or invisibles as they are called, have as in the 1990s done more than merchandise exports to contain the trade gap. Last year, for the first time ever, the surplus in invisibles trade has been more than the merchandise deficit. Since the current account surplus of 2001-02 was the result of a sluggishness in imports it is not as healthy a development as it would have been if both exports and imports had been growing.

The mixed performance in the external sector has continued into the current fiscal year. Exports increased by 18 per cent in April before growth slumped to under 4 per cent in May. Going by a few other economic trends, however, the economy is looking up. There has been a marginal improvement in the performance of manufacturing while a number of core sectors are showing monthly growth rates of more than 5 per cent. Signs of a turnaround are corroborated by tax collections; excise duty revenue increased by 29 per cent in the first two months of 2002-03 and direct tax collections rose by 18 per cent. Yet another positive development is that bank lending to the commercial sector — an indication of the demand for working capital — is growing fairly rapidly. Non-food credit between the end of March and the week ended June 14 had increased by 9.7 per cent, while in the corresponding period of last year there had been a contraction of bank lending to the commercial sector. However, there is as yet no indication that economic revival is widespread in the industrial sector. The only two industries doing particularly well are cement and steel, whose improved fortunes can be attributed to housing activity and the national highways project. For now, judgment must be reserved about an economic revival having taken root.

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